By Todd Rosenbluth, CFRA
What percentage of average actively managed large cap strategies outperformed the Russell 1000 US Comprehensive Factor index? How about the MSCI USA Diversified Multiple Factor index? While those phrases are not being regularly written, perhaps even inside FTSE Russell and MSCI offices, a recent survey of global institutional investors indicates adoption of such smart beta benchmarks is becoming more accepted.
FTSE Russell released this week the results of its early 2017 survey of almost 200 asset institutions, with a combined assets under management of $2 trillion about their investments in and views toward smart beta indices. To us, the trends were favorable, as 46% of global respondents said they had a smart beta product allocation.
More compelling to us was that half of the global institutions that had previously evaluated but not implemented smart beta strategies were reevaluating in 2017. While pricing for smart beta ETFs in the US has come down recently and the products had longer life histories to consider, the majority of respondents pointed to increased understanding through new information and education as well as new types of smart beta strategies, including multi factor ones.
Indeed, there are a variety of multi-factor products to consider even connected to the same index provider. For example, O’Shares FTSE US Quality Dividend ETF (OUSA) tracks a FTSE Russell index constructed based on three factors (dividends, quality and low volatility), while JPMorgan Diversified Return US Equity ETF (JPUS) tracks a FTSE Russell index based on four, not identical, factors (quality, low volatility, value, momentum). Lastly, Deutsche X-Trackers Russell 1000 Comprehensive Factor ETF (DEUS) tracks a different index from the same family and incorporates five factors (quality, low volatility, size, momentum and value).
In ranking more than 1,000 equity ETFs, CFRA focuses more on the underlying holdings and costs than its longer-term track record. The exposure and performance of these three ETF are different, evidenced by JPUS’s 8.4% year to date gain outperforming both OUSA and DEUS by more than 170 basis points.